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Automatic Data Processing Inc. (ADP - Analyst Report) reported second-quarter fiscal 2014 earnings from continuing operations of 78 cents per share, which beat the Zacks Consensus Estimate by a penny.

Quarter Details

Revenues increased 8.6% year over year to $2.98 billion and were ahead of the Zacks Consensus Estimate of $2.94 billion. The year-over-year growth was driven by strong results from Employer Services, PEO Services and Dealer Services segments.

Employer Services revenues increased 8.8% year over year to $2.09 billion. The number of employees on clients’ payrolls in the United States grew 2.9% in the quarter on a same-store-sales basis.

PEO Services revenues rose 14.0% year over year to $531.1 million in the reported quarter. Dealer Services revenues increased 7.0% on a year-over-year basis to $484.2 million.

Interest on funds held for clients declined 12.3% year over year to $89.2 million. The decline was primarily due to a 50 basis points (bps) drop in average interest yield to 1.9%, which was offset to a certain extent by an increase of 9% in average client funds balances from $17.0 billion to $18.5 billion.

Total expenses in the reported quarter increased 8.8% year over year to $2.45 billion, attributable to higher operating expenses (up 9.1% year over year), selling, general & administrative expense (up 8.1% year over year) and systems development & programming costs (up 12.1% year over year).

ADP reported pre-tax earnings of $561.1 million from continuing operations, up 6.1% from the year-ago quarter. Net earnings from continuing operations increased 7.1% from the year-ago quarter to $377.0 million.

ADP exited the quarter with cash and cash equivalents of $1.29 billion compared with $1.69 billion in the previous quarter. Long-term debt was $12.6 million versus $14.2 million in the previous quarter.

Guidance

ADP expects fiscal 2014 revenues to grow 7.0% to 8.0% (prior outlook7.0%) on a year-over-year basis. Earnings growth is projected to be in the range of 8% to 10%.

Employer Services revenues are expected to grow approximately 7% with a pre-tax margin expansion of approximately 100 bps. PEO Services revenues are expected to improve 12.0% to 13.0% (prior outlook 10.0% to 12.0%). Pre-tax margin is expected to grow slightly on a year-over-year basis.

Combined Employer Services and PEO Services new business bookings is forecasted to be approximately 8.0%, which is the lower-end of prior forecasted range of 8.0% to 10.0% growth for fiscal 2014.

ADP expects Dealer Services revenues to increase 8.0% with a pre-tax margin expansion of approximately 100 bps.

Our Take

ADP is expected to perform better on the back of improved execution and higher client retention. Moreover, recovery in the job market will help the company. However, volatile macroeconomic environment and increasing competition from Paychex Inc. (PAYX - Snapshot Report), Insperity Inc. (NSP - Snapshot Report) and Equifax Inc (EFX - Analyst Report) are the near-term headwinds.

Currently, ADP has a Zacks Rank #2 (Buy).

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